9 May 2012
Montepaschi, the GdF is not the end of its problems
Banca Monte Paschi had a Core Tier 1 ratio of 10.3% at the end of 2011, while Banca Popolare di Milano was at only 8.0%. So Monte Paschi is the safer bank. Actually, I would argue it is not because the figures it uses to calculate how risky its assets are have little bearing to reality or Pop Milano should have a Core Tier 1 ratio of 16%.
So Monte Paschi had Risk Weighted Assets as a % of assets at the end of 2011 that was probably just under 45%. While I estimate the figure was over 85% for Pop Milano as the Bank of Italy had told them to increase the risk weighting which went from up from under 70% at the end of 2010. Pop Milano’s assets had become increasingly risky, according to the Bank of Italy, and the loss registered at the end of 2011 would seem to vindicate this decision. In the meantime, Monte Paschi’s assets are half as risky as those of Pop Milano.
But Monte Paschi’s assets are objectively riskier than those of Pop Milano. I estimate that, net of loss provisions, 9.2% of its loans were not performing or had been restructured at the end of 2011, while only 6.3% of Pop Milano’s had. This is a striking difference. And the opposite of what one would expect. Pop Milano actually has a loan book that I would argue presents two thirds of the risk of Monte Paschi’s, but has double the risk weighting given to these assets.
And there does not appear to be a major difference in the composition of the asset book which could explain the divergence. Clients loans are 61% of Monte Paschi’s assets, while they are 69% for BPM. At the end of 2010, Monte Paschi did appear to have a technically safer loan book with a larger % of mortgages than Pop Milano, 58% against 47%, but did still manage to have a larger % non-performing as I pointed out above. The trading book is about the same size, 23% of assets for Monte Paschi, 21% for Pop Milano, mostly invested in government bonds. It looks as though Monte Paschi has a riskier trading book than Pop Milano, the loss in the valuation reserves was 6.8% of the trading book for Paschi against 3.3% for Pop Milano. And then lending to banks is 9% for Monte Paschi, 4% for Pop Milano, which should weigh in Monte Paschi’s favour, but not enough to explain the massive difference in risk weighting.
It is noticeable that the risk weighting of Monte Paschi’s assets has shrunk dramatically from 2007 after the takeover of Antonveneta without any apparent major change in the nature of its banking operations and whilst the sofferenze and incagli have increased as a % of loans to clients from 3% in 2007 to 7.4% at the end of 2011, I estimate. But, in 2007, the risk weighting was at 70%, not so far from Pop Milano, and today it is under 45%. Risk weight the assets today at 70% and I calculate Monte Paschi’s Tier 1 ratio would be around 6.6%. And the bank also needs to pay back the € 1.9bln of Tremonti bonds.
And it is not only the loan book which is risky. Monte Paschi had the biggest loss in the valuation reserves at the end of 2011. It was at - € 3.8bln, against - € 3.3bln for Intesa and - € 1.7bln for Unicredit. This was despite having a smaller year end amount of assets available for sale at € 22.9bln against € 29.6bln for Intesa and Unicredit should be around € 60bln. It looks as though Monte Paschi has been making the most leveraged, and worst, investments of the big banks as well as having the worst loan quality.